Brown-Forman Corporation (NYSE:BFA) (NYSE:BFB) reported
financial results for its first quarter of fiscal 2018, ended July
31, 2017. For the first quarter, the company’s reported net sales1
increased 9% to $723 million (+6% on an underlying basis2) compared
to the same prior-year period. Reported operating income increased
14% in the quarter to $244 million (+12% on an underlying basis).
Diluted earnings per share of $0.46 increased 27%.
Paul Varga, the company's Chief Executive Officer, said, “Fiscal
2018 is off to a strong start with 6% growth in underlying net
sales and 12% growth in underlying operating income, both metrics
representing a nice acceleration versus the company's solid fiscal
2017 underlying results. We continue to foresee growth potential
for our brands, most notably in American Whiskey, and accordingly,
we intend to invest against this opportunity with ever-improving
prioritization, competitiveness, effectiveness, and
efficiency.”
Varga added, “With only one quarter behind us, we are
reaffirming our outlook for 6-8% underlying operating income growth
while raising our EPS range to $1.85 - $1.95 due to expected full
year benefits from our tax rate and foreign exchange.”
First Quarter Fiscal 2018
Highlights
- Underlying net sales increased 6%, the
fourth consecutive quarterly improvement in growth:
- Emerging markets continued to improve
in the quarter, growing underlying net sales 19% (+27%
reported)
- Developed markets grew underlying net
sales by 3% (+7% reported), including 5% growth in the United
States (+10% reported)
- The Jack Daniel’s family of brands
delivered broad-based growth, with underlying net sales up 6% (+10%
reported), including underlying growth of 4% (+9% reported) for
Jack Daniel’s Tennessee Whiskey
- The company’s super- and ultra-premium
American whiskey brands3 experienced strong underlying net sales
growth, including 16% growth from Woodford Reserve (+10%
reported)
- Herradura grew underlying net sales 18%
(+11% reported), el Jimador +13% (+19% reported) and New Mix RTDs
grew double-digits.
- Underlying operating income grew 12%,
and reported operating margin expanded from 32.2% to 33.7%
- Underlying SG&A declined 1% (-1%
reported)
- The company reaffirmed full year
expectations for 4-5% underlying net sales growth and 6-8%
underlying operating income growth, and increased the FY18 EPS
outlook to $1.85-$1.95.
First Quarter of Fiscal 2018
Performance By Market
Year-to-date underlying net sales grew 5% (+10% reported) in the
United States. Sales growth was driven by continued gains for the
Jack Daniel’s family of brands, including Tennessee Whiskey,
Tennessee Honey, Tennessee Fire and Gentleman Jack. The company’s
bourbon brands delivered sustained growth, including double-digit
underlying net sales growth from Woodford Reserve and Old Forester.
Herradura and el Jimador tequila grew underlying net sales
mid-teens in the United States as the company continues to invest
behind building consumer brand awareness for both of these 100%
agave tequilas.
Underlying net sales in the company’s developed markets outside
of the United States were flat in the first quarter (+2% reported).
Australia’s 17% (+12% reported) underlying net sales growth was
fueled by buy-ins in advance of excise tax driven price increases.
Japan’s underlying net sales declined due to comparisons with the
prior year’s buy-ins related to last year’s large price increases.
Declines in other large developed markets were also negatively
impacted by timing, including the United Kingdom and Germany, but
the company expects these markets to normalize in the second
quarter as the comparisons ease considerably.
Underlying net sales in the emerging markets continued to
accelerate from last year’s sluggish start to the year, delivering
19% growth in the first quarter (+27% reported). The company’s two
largest emerging markets, Mexico and Poland, grew underlying and
reported net sales double-digits, with results in both countries
driven by solid growth for the Jack Daniel’s family of brands.
Mexico also benefited from continued growth of New Mix RTDs, el
Jimador, and Herradura. Underlying and reported net sales in the
company’s other emerging markets, such as Russia, Turkey, Brazil,
China, and Ukraine experienced strong double-digit rates of growth.
Results were propelled by improving consumer demand in a more
stable exchange rate environment, while also benefiting from easy
comparisons to a soft prior year period.
Travel Retail continues to deliver solid rates of growth, with
underlying net sales up 12% (+4% reported). The company is driving
improved rates of growth through increased focus on key global
accounts. Results also benefited from higher passenger volumes in
markets such as Russia, Turkey and Brazil.
First Quarter of Fiscal 2018
Performance By Brand
The company’s underlying net sales growth was led by the Jack
Daniel’s family, up 6% (+10% reported). Jack Daniel’s Tennessee
Whiskey experienced 4% underlying net sales growth (+9% reported)
globally, as an acceleration in the emerging markets offset a soft
start in the developed markets outside of the United States. Jack
Daniel’s Tennessee Honey’s underlying net sales grew 3% globally
(+3% reported) as it entered its seventh year in the marketplace.
Gentleman Jack, the largest super-premium American whiskey brand in
markets outside of the United States according to IWSR, grew
underlying net sales 8% (+7% reported). Jack Daniel’s Tennessee
Fire’s underlying net sales grew 14% (+21% reported), as the brand
continues to benefit from its global rollout, as well as solid
growth in the United States. Jack Daniel’s RTD/RTP business grew
underlying net sales 22% (+24% reported) due to continued organic
growth in this business, new product innovation such as Jack
Daniel’s American Serve and Jack Daniel’s Cider, as well as buy-ins
ahead of a price increase in Australia.
Brown-Forman’s portfolio of super- and ultra-premium whiskey
brands, including Woodford Reserve, Jack Daniel’s Single Barrel,
and Gentleman Jack, delivered double-digit rates of aggregate
growth. Woodford Reserve grew underlying net sales 16% (+10%
reported), and Old Forester grew even faster.
Finlandia vodka grew underlying net sales 6% (+17% reported),
helped by improved results in Poland against a very competitive
environment, strong growth in Russia, and gains in Travel
Retail.
el Jimador grew underlying net sales by 13% (+19% reported),
fueled by strong and accelerating takeaway trends in the United
States, and better results in Mexico following the multi-year price
increases as the brand has been repositioned at a more premium
level. New Mix’s underlying net sales increased double-digits as
takeaway trends remained strong. Herradura grew underlying net
sales by 18% (+11% reported), driven by double-digit gains in both
the United States and Mexico.
Other P&L Items
Company-wide price/mix contributed two percentage points to
underlying net sales growth, with higher volumes accounting for the
other four percentage points of growth. Year-to-date underlying
gross profit grew 6% while reported gross profit increased 9%. The
last three years of foreign exchange headwinds on net sales growth
diminished in the quarter, and foreign exchange is now expected to
be a slight positive in fiscal 2018.
First quarter underlying A&P spend increased 6% (+8%
reported), as the company invested significantly behind the Jack
Daniel’s family of brands, as well as the continued development of
the fast growing bourbon and tequila brands. Cost discipline helped
drive a continued decline in underlying SG&A, down 1% (-1%
reported). The company delivered underlying operating income growth
of 12% (+14% reported) during the first quarter, as operating
margin expanded by 150 basis points to 33.7%.
Financial Stewardship
On July 27, 2017, Brown-Forman declared a regular quarterly cash
dividend of $0.1825 per share on the Class A and Class B common
stock, resulting in an annualized cash dividend of $0.73 per share.
The quarterly cash dividend is payable on October 2, 2017 to
stockholders of record on September 7, 2017. Brown-Forman has paid
regular quarterly cash dividends for 72 consecutive years and has
increased the dividend for 33 consecutive years.
Fiscal Year 2018 Outlook
The global economy remains volatile, particularly in the
emerging markets, and the competitive landscape has intensified in
the developed world, making it difficult to accurately predict
future results. Assuming no deterioration in current trends, the
company anticipates:
- Underlying net sales growth of 4% to
5%, led by our premium American whiskey and tequila brands,
including disciplined innovation for Jack Daniel’s RTDs, as well as
the launch of Jack Daniel's Tennessee Rye and Slane Irish
Whiskey.
- Flat underlying SG&A as the company
expects to continue its disciplined approach to managing
costs.
- Underlying operating income growth of
6% to 8%.
- Diluted earnings per share of $1.85 to
$1.95, which now incorporates a tax rate of approximately 28% and a
slightly favorable impact from foreign exchange.
Conference Call Details
Brown-Forman will host a conference call to discuss the results
at 10:00 a.m. (EDT) today. All interested parties in the United
States are invited to join the conference call by dialing
888-624-9285 and asking for the Brown-Forman call. International
callers should dial +1-706-679-3410. The company suggests that
participants dial in ten minutes in advance of the 10:00 a.m. (EDT)
start of the conference call. A live audio broadcast of the
conference call, and the accompanying presentation slides, will
also be available via Brown-Forman’s Internet website, http://www.brown-forman.com/, through a link to
“Investors/Events & Presentations.” For those unable to
participate in the live call, information regarding the digital
audio recording of the conference call and the presentation slides
will also be on the website. The replay will be available for at
least 30 days following the conference call.
For nearly 150 years, Brown-Forman Corporation has enriched the
experience of life by responsibly building fine quality beverage
alcohol brands, including Jack Daniel’s Tennessee Whiskey, Jack
Daniel’s & Cola, Jack Daniel’s Tennessee Honey, Jack Daniel’s
Tennessee Fire, Gentleman Jack, Jack Daniel’s Single Barrel,
Finlandia, Korbel, el Jimador, Woodford Reserve, Old Forester,
Canadian Mist, Herradura, New Mix, Sonoma-Cutrer, Early Times,
Chambord, BenRiach, GlenDronach and Slane. Brown-Forman’s brands
are supported by over 4,700 employees and sold in more than 165
countries worldwide. For more information about the company, please
visit http://www.brown-forman.com/.
Footnotes:1 Percentage growth rates are compared to prior-year
periods, unless otherwise noted.2 We present changes in certain
income statement line-items that are adjusted to an “underlying”
basis, which we believe assists in understanding both our
performance from period to period on a consistent basis and the
trends of our business. Non-GAAP “underlying” measures include
changes in (a) underlying net sales, (b) underlying gross profit,
(c) underlying advertising expenses, (d) underlying selling,
general and administrative expenses and (e) underlying operating
income. A reconciliation of these non-GAAP measures for the
three-month period ended July 31, 2017, to the most closely
comparable GAAP measure, and the reasons why management believes
these adjustments to be useful, are included in Schedule A in this
press release.3 Super/Ultra-premium American whiskey brands include
Woodford Reserve, Jack Daniel’s Single Barrel, Gentleman Jack,
Sinatra Select, and No. 27 Gold.
This press release contains statements, estimates, and
projections that are “forward-looking statements” as defined under
U.S. federal securities laws. Words such as “aim,” “anticipate,”
“aspire,” “believe,” “continue,” “could,” “envision,” “estimate,”
“expect,” “expectation,” “intend,” “may,” “plan,” “potential,”
“project,” “pursue,” “see,” “seek,” “should,” “will,” and similar
words identify forward-looking statements, which speak only as of
the date we make them. Except as required by law, we do not intend
to update or revise any forward-looking statements, whether as a
result of new information, future events, or otherwise. By their
nature, forward-looking statements involve risks, uncertainties and
other factors (many beyond our control) that could cause our actual
results to differ materially from our historical experience or from
our current expectations or projections. These risks and
uncertainties include, but are not limited to:
- Unfavorable global or regional economic
conditions, and related low consumer confidence, high unemployment,
weak credit or capital markets, budget deficits, burdensome
government debt, austerity measures, higher interest rates, higher
taxes, political instability, higher inflation, deflation, lower
returns on pension assets, or lower discount rates for pension
obligations
- Risks associated with being a
U.S.-based company with global operations, including commercial,
political and financial risks; local labor policies and conditions;
protectionist trade policies or economic or trade sanctions;
compliance with local trade practices and other regulations,
including anti-corruption laws; terrorism; and health
pandemics
- Fluctuations in foreign currency
exchange rates, particularly a stronger U.S. dollar
- Changes in laws, regulations, or
policies - especially those that affect the production,
importation, marketing, labeling, pricing, distribution, sale, or
consumption of our beverage alcohol products
- Tax rate changes (including excise,
sales, VAT, tariffs, duties, corporate, individual income,
dividends, capital gains) or changes in related reserves, changes
in tax rules (for example, LIFO, foreign income deferral, U.S.
manufacturing and other deductions) or accounting standards, and
the unpredictability and suddenness with which they can occur
- Dependence upon the continued growth of
the Jack Daniel’s family of brands
- Changes in consumer preferences,
consumption or purchase patterns - particularly away from larger
producers in favor of smaller distilleries or local producers, or
away from brown spirits, our premium products, or spirits
generally, and our ability to anticipate or react to them; bar,
restaurant, travel or other on-premise declines; shifts in
demographic trends; unfavorable consumer reaction to new products,
line extensions, package changes, product reformulations, or other
product innovation
- Decline in the social acceptability of
beverage alcohol products in significant markets
- Production facility, aging warehouse or
supply chain disruption
- Imprecision in supply/demand
forecasting
- Higher costs, lower quality or
unavailability of energy, water, raw materials, product
ingredients, labor or finished goods
- Route-to-consumer changes that affect
the timing of our sales, temporarily disrupt the marketing or sale
of our products, or result in higher implementation-related or
fixed costs
- Inventory fluctuations in our products
by distributors, wholesalers, or retailers
- Competitors’ consolidation or other
competitive activities, such as pricing actions (including price
reductions, promotions, discounting, couponing or free goods),
marketing, category expansion, product introductions, or entry or
expansion in our geographic markets or distribution networks
- Risks associated with acquisitions,
dispositions, business partnerships or investments - such as
acquisition integration, or termination difficulties or costs, or
impairment in recorded value
- Inadequate protection of our
intellectual property rights
- Product recalls or other product
liability claims; product counterfeiting, tampering, contamination,
or product quality issues
- Significant legal disputes and
proceedings; government investigations (particularly of industry or
company business, trade or marketing practices)
- Failure or breach of key information
technology systems
- Negative publicity related to our
company, brands, marketing, personnel, operations, business
performance or prospects
- Failure to attract or retain key
executive or employee talent
- Our status as a family “controlled
company” under New York Stock Exchange rules
For further information on these and other risks, please refer
to the “Risk Factors” section of our annual report on Form 10-K and
quarterly reports on Form 10-Q filed with the SEC.
Use of Non-GAAP Financial Information: This press release
includes measures not derived in accordance with U.S. generally
accepted accounting principles (“GAAP”), underlying net sales,
underlying gross profit, underlying advertising expense, underlying
SG&A, and underlying operating income. These measures should
not be considered in isolation or as a substitute for any measure
derived in accordance with GAAP, and also may be inconsistent with
similar measures presented by other companies. Reconciliations of
the underlying measures to the most closely comparable GAAP
measures, and reasons for the company’s use of these measures, are
presented on Schedules A and B attached hereto.
Brown-Forman Corporation
Unaudited Consolidated Statements of
Operations
For the Three Months Ended July 31,
2016 and 2017
(Dollars in millions, except per share
amounts)
2016 2017
Change Sales $ 856 $ 929 8 % Excise taxes 195 206
6 % Net sales 661 723 9 % Cost of sales 208 230
11 % Gross profit 453 493 9 % Advertising expenses 82 89 8 %
Selling, general, and administrative expenses 163 161 (1 %)
Amortization expense — — Other expense (income), net (5 ) (1 )
Operating income 213 244 14 % Interest expense, net 12 15
Income before income taxes 201 229 14 % Income taxes 57
51 Net income $ 144 $ 178 24 %
Earnings per share: Basic $ 0.37 $ 0.46 26 % Diluted $ 0.36 $ 0.46
27 % Gross margin 68.5 % 68.1 % Operating margin 32.2 % 33.7
% Effective tax rate 28.2 % 22.1 % Cash dividends
paid per common share $ 0.1700 $ 0.1825
Shares (in thousands) used in the
calculation of earnings per share
Basic 393,018 384,038 Diluted 396,009 386,387
Brown-Forman Corporation
Unaudited Condensed Consolidated Balance
Sheets
(Dollars in millions)
April 30,2017 July
31,2017 Assets: Cash and cash equivalents $ 182 $ 238 Accounts
receivable, net 557 576 Inventories 1,270 1,337 Other current
assets 342 352 Total current assets 2,351 2,503 Property,
plant, and equipment, net 713 719 Goodwill 753 755 Other intangible
assets 641 661 Other assets 167 164 Total assets $ 4,625 $ 4,802
Liabilities: Accounts payable and accrued expenses $ 501 $
454 Dividends payable — 70 Accrued income taxes 9 57 Short-term
borrowings 211 258 Current portion of long-term debt 249 250 Total
current liabilities 970 1,089 Long-term debt 1,689 1,720
Deferred income taxes 152 135 Accrued postretirement benefits 314
298 Other liabilities 130 140 Total liabilities 3,255 3,382
Stockholders’ equity 1,370 1,420 Total liabilities and
stockholders’ equity $ 4,625 $ 4,802
Brown-Forman Corporation
Unaudited Condensed Consolidated
Statements of Cash Flows
For the Three Months Ended July 31,
2016 and 2017
(Dollars in millions)
2016 2017 Cash
provided by operating activities $ 128 $ 102 Cash flows from
investing activities: Acquisition of business, net of cash acquired
(307 ) — Additions to property, plant, and equipment (16 ) (28 )
Other (1 ) — Cash used for investing activities (324 ) (28 )
Cash flows from financing activities: Net change in
short-term borrowings (43 ) 45 Proceeds from long-term debt 717 —
Debt issuance costs (5 ) — Acquisition of treasury stock (201 ) (1
) Dividends paid (67 ) (70 ) Other (3 ) (5 ) Cash provided by (used
for) financing activities 398 (31 ) Effect of exchange rate
changes on cash and cash equivalents (6 ) 13 Net
increase in cash and cash equivalents 196 56 Cash and cash
equivalents, beginning of period 263 182 Cash
and cash equivalents, end of period $ 459 $ 238
Schedule A
Brown-Forman Corporation Supplemental Information
(Unaudited)
Three Months Ended Fiscal Year
Ended July 31, 2017 April 30, 2017
Reported change in net sales 9% (3)%
Acquisitions & divestitures 1% 3% Impact of foreign exchange
(1)% 2% Estimated net change in distributor inventories (3)% 1%
Underlying change in net sales 6% 3%
Reported change in gross profit 9%
(6)% Acquisitions & divestitures —% 4% Impact of foreign
exchange 1% 3% Estimated net change in distributor inventories (3)%
1%
Underlying change in gross profit 6%
3% Reported change in advertising 8%
(8)% Acquisitions & divestitures —% 8% Impact of foreign
exchange (1)% 2%
Underlying change in advertising
6% 2% Reported change in SG&A
(1)% (3)% Acquisitions & divestitures —% —%
Impact of foreign exchange —% 1%
Underlying change in
SG&A (1)% (2)% Reported change in
operating income 14% (35)% Acquisitions &
divestitures (1)% 35% Impact of foreign exchange 5% 4% Estimated
net change in distributor inventories (6)% 3%
Underlying
change in operating income 12% 7% Note: Totals
may differ due to rounding
Notes:
We use certain financial measures in this report that are not
measures of financial performance under GAAP. These non-GAAP
measures, defined below, should be viewed as supplements to (not
substitutes for) our results of operations and other measures
reported under GAAP. The non-GAAP measures we use in this report
may not be defined and calculated by other companies in the same
manner.
“Underlying change” in income statement
measures. We present changes in certain income statement
measures, or line items, that are adjusted to an “underlying”
basis. We use “underlying change” for the following income
statement measures: (a) underlying net sales, (b) underlying gross
profit, (c) underlying advertising expenses, (d) underlying
selling, general, and administrative (SG&A) expenses, and (e)
underlying operating income. To calculate these measures, we
adjust, as applicable, for (a) acquisition and divestiture
activity, (b) foreign exchange, and (c) estimated net changes in
distributor inventories. We explain these adjustments below.
- “Acquisitions and divestitures.” In
fiscal 2016, we sold our Southern Comfort and Tuaca brands and
related assets to Sazerac Company, Inc. and entered in a related
transition services agreement (TSA). During fiscal 2017, we
completed our obligations under the TSA. This adjustment removes
the net sales and operating expenses recognized in fiscal 2017
pursuant to the TSA related to (a) contract bottling services and
(b) distribution services in certain markets. On June 1, 2017, we
acquired The BenRiach Distillery Company Limited (BenRiach). This
adjustment removes (a) transaction and integration costs related to
the acquisition and (b) operating activity for the acquisition for
the non-comparable periods. For fiscal 2017 and 2018, the
non-comparable period for each fiscal year is the month of May. We
believe that these adjustments allow us to understand better our
underlying results on a comparable basis.
- “Foreign exchange.” We calculate the
percentage change in our income statement line items in accordance
with GAAP and adjust to exclude the cost or benefit of currency
fluctuations. Adjusting for foreign exchange allows us to
understand our business on a constant-dollar basis, as fluctuations
in exchange rates can distort the underlying trend both positively
and negatively. (In this report, “dollar” always means the U.S.
dollar unless stated otherwise.) To eliminate the effect of foreign
exchange fluctuations when comparing across periods, we translate
current year results at prior-year rates.
- “Estimated net change in distributor
inventories.” This adjustment refers to the estimated net effect of
changes in distributor inventories on changes in our income
statement line items. For each period compared, we use depletion
information provided by our distributors to estimate the effect of
distributor inventory changes on our income statement line items.
We believe that adjusting for the effect of varying levels of
distributor inventories on changes in our income statement line
items allows us to understand better underlying results and
trends.
We use the non-GAAP measures “underlying change” for the
following reasons: (a) to understand our performance from period to
period on a consistent basis and to compare our performance to that
of our competitors; (b) to align with management incentive
compensation calculations; (c) for consistency with our planning
and forecasting processes; and (d) to communicate our financial
performance with the board of directors, stockholders, and
investment analysts.
Schedule B
Brown-Forman Corporation Supplemental Brand
Information (Unaudited) Three Months Ended July 31, 2017
% Change vs. Prior Year Period
Brand
Depletions1 Net Sales2
Equivalent
Conversion3
Reported
Acquisitions and Divestitures
Foreign Exchange
Estimated Net Change in Distributor
Inventories
Underlying
Jack Daniel’s Family 6% 10%
—% (1)% (3)% 6%
Jack Daniel’s Tennessee Whiskey 4% 9%
—% (1)% (4)%
4% Jack Daniel’s Tennessee Honey 5%
3% —% (1)% 1%
3% Jack Daniel’s RTD/RTP 17%
24% —% —% (2)%
22% Gentleman Jack 8% 7%
—% —% 1% 8%
Jack Daniel’s Tennessee Fire 19% 21%
—% (1)% (6)%
14% Woodford Reserve 16% 10%
—% —% 6%
16% Finlandia 6% 17% —%
—% (10)% 6% el Jimador
11% 19% —%
1% (7)% 13% Herradura 13%
11% —% —%
7% 18% All Other Brands (3)%
7% —% (1)% (5)%
1% Subtotal 4% 10%
—% (1)% (3)% 6%
Other Non-Branded NM (8)%
23% 1% —% 16% Total
Portfolio 4% 9% 1%
(1)% (3)% 6%
Note: Totals may differ due to rounding.
1 Depletions are shipments direct to retail or from distributors
to wholesale and retail customers, and are commonly regarded in the
industry as an approximate measure of consumer demand.2 Net sales
is a shipment based metric; shipments and depletions can be
different due to timing. Please see the Notes to Schedule A in this
press release for additional information on the impact of foreign
currencies and estimated net change in distributor inventories and
the reasons why we believe that the presentation of these non-GAAP
financial measures provides useful information to investors.3
Equivalent conversion depletions represent the conversion of
ready-to-drink (RTD) and ready-to-pour (RTP) brands to a similar
drinks equivalent as the parent brand for various trademark
families. RTD volumes are divided by 10, while RTP volumes are
divided by 5.
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Brown-Forman CorporationPhil Lynch, 502-774-7928Vice
PresidentCorporate Communications and Public RelationsorJay Koval,
502-774-6903Vice PresidentInvestor Relations and Community
Relations
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